Montclair hospital sold for lease-back

By LINDY WASHBURN

STAFF WRITER |

The Record

Hackensack University Medical Center and its joint-venture partner have sold the land and buildings of the Montclair hospital they own and will lease them back — a deal that gives them $115 million in cash while they continue to operate the hospital.

The acquisition of HackensackUMC Mountainside by Medical Properties Trust gives the real estate investment firm three hospitals in New Jersey, including Bayonne Medical Center and Hoboken University Medical Center. The two Hudson County hospitals are owned by CarePoint Health System, another small for-profit chain.

The Birmingham-based investment fund also works closely with Prime Healthcare Services Inc. of California, which has applications pending to buy St. Mary’s Hospital in Passaic, St. Michael’s Medical Center in Newark and St. Clare’s Health System in Morris and Sussex counties. Prime was able to expand rapidly — from a few hospitals in Southern California to 25 hospitals in six states — over the last few years by leveraging its hospital real estate through sales to the investment trust.

In Montclair, the new financing "ensures the continued long-term operation of a general acute-care hospital on the property for multiple decades," said Natalie Thigpen, a vice president of HackensackUMC Mountainside. The deal "will help to enhance patient care by providing an infusion of investment capital" to upgrade information technology and patient safety equipment, as well as improve the hospital’s appearance, she said.

It may also be used to fund "future acquisitions," according to an executive with LHP Hospital Group Inc., Hackensack’s partner.

The sale and lease-back of property is a method companies use to raise capital when their for-profit status makes them ineligible to issue tax-exempt bonds. Operators of medical-office buildings, nursing homes, hotels and shopping malls commonly make such deals, but they are relatively new for hospitals. The investors receive tax advantages, while the hospital operator makes lease payments that include interest. The interest paid is higher than would be paid for borrowing on the bond market or through bank loans.

But the lack of state oversight has raised concern among legislators, who have questioned whether state regulators should do more to monitor the deals.

"There is zero transparency," said state Sen. Joseph Vitale, D-Woodbridge, who is chairman of the Senate Health Committee.

He noted that Mountainside, which was non-profit until it was sold to a previous owner in 2007 "received tax breaks for years, and now these owners will make a fistful of money."

The state Health Department doesn’t scrutinize real estate transactions. Hospitals are not required to disclose the terms, which may include escalating rent payments, or how they use the proceeds. The money need not be reinvested in the hospital, for example, and might be distributed to investors or used to buy another hospital or health care business.

Meadowlands Hospital Medical Center in Secaucus, also owned by a for-profit group, sold its land to a real estate investor in December 2013, but subsequently appeared to have cash problems that made it late with federal tax payments.

At a state budget hearing in April, Assemblyman Gary Schaer, D-Passaic, questioned Health Commissioner Mary O’Dowd about the state’s role. "We have a new arrangement that is relatively new in New Jersey, which is the unregulated sale lease-back, where hospital property is sold to private investors and leased back to hospital owners without any public scrutiny or protections," he said. "Is there a role for the [health] department to be much more involved in governance?"

In response, O’Dowd said, "There are a number of different financial vehicles that are available to different institutions. This happens to be one that hospitals have recently taken up, but it has been in practice in our nursing homes for a very long time." If the state interferes with hospitals’ ability to raise money that way, she said, the state may cause the hospitals financial harm.

Hackensack, in partnership with LHP Hospital Group, bought Mountainside Hospital in July 2012 for $190 million. Hackensack has a 20 percent stake in the 260-bed hospital.

The partnership also owns HackensackUMC at Pascack Valley, in Westwood. While there are no current plans to sell that hospital’s real estate to an investment trust, LHP, "like any smart company, is open to evaluating its options and favorable market conditions on an ongoing basis," an LHP spokeswoman said Tuesday.

LHP did not disclose the terms of the transaction involving Mountainside. The sale and lease-back "made good strategic sense," said John W. Ehrle, LHP’s chief financial officer. It’s "an efficient funding vehicle that, together with our cash from operations, positions us for additional investment in both our existing operations and future acquisitions," he said.

The company, based in Plano, Texas, has emphasized its long-term commitment to investing in and operating community hospitals, and the investment backing it receives from the Canadian Pension Plan Investment Board and CCMP Capital Advisors, one of the world’s largest private-equity funds.

"While the joint venture is a tax-paying entity, the not-for-profit partner was very involved in the negotiating and structuring of the transaction, including terms of the lease," said R. Steven Hamner, executive vice president and chief financial officer of Medical Properties Trust. It is MPT’s first deal with a not-for-profit hospital operator, he said, and "demonstrates that not-for-profit hospital operators are able to retain control over their real estate assets and at the same time benefit from the significant capital proceeds that result from sale/leaseback arrangements."

Medical Properties Trust will receive lease payments from the Montclair hospital for 15 years, with an option to renew for 25 years, according to a conference call with investors Tuesday. It will play no role in the hospital’s day-to-day operations. Typically, when a "tenant" in a hospital property it owns decides not to renew the lease, the trust then looks for another tenant, or hospital operator.

Montclair hospital sold for lease-back

By LINDY WASHBURN

STAFF WRITER |

The Record

Hackensack University Medical Center and its joint-venture partner have sold the land and buildings of the Montclair hospital they own and will lease them back — a deal that gives them $115 million in cash while they continue to operate the hospital.

The acquisition of HackensackUMC Mountainside by Medical Properties Trust gives the real estate investment firm three hospitals in New Jersey, including Bayonne Medical Center and Hoboken University Medical Center. The two Hudson County hospitals are owned by CarePoint Health System, another small for-profit chain.

The Birmingham-based investment fund also works closely with Prime Healthcare Services Inc. of California, which has applications pending to buy St. Mary’s Hospital in Passaic, St. Michael’s Medical Center in Newark and St. Clare’s Health System in Morris and Sussex counties. Prime was able to expand rapidly — from a few hospitals in Southern California to 25 hospitals in six states — over the last few years by leveraging its hospital real estate through sales to the investment trust.

In Montclair, the new financing "ensures the continued long-term operation of a general acute-care hospital on the property for multiple decades," said Natalie Thigpen, a vice president of HackensackUMC Mountainside. The deal "will help to enhance patient care by providing an infusion of investment capital" to upgrade information technology and patient safety equipment, as well as improve the hospital’s appearance, she said.

It may also be used to fund "future acquisitions," according to an executive with LHP Hospital Group Inc., Hackensack’s partner.

The sale and lease-back of property is a method companies use to raise capital when their for-profit status makes them ineligible to issue tax-exempt bonds. Operators of medical-office buildings, nursing homes, hotels and shopping malls commonly make such deals, but they are relatively new for hospitals. The investors receive tax advantages, while the hospital operator makes lease payments that include interest. The interest paid is higher than would be paid for borrowing on the bond market or through bank loans.

But the lack of state oversight has raised concern among legislators, who have questioned whether state regulators should do more to monitor the deals.

"There is zero transparency," said state Sen. Joseph Vitale, D-Woodbridge, who is chairman of the Senate Health Committee.

He noted that Mountainside, which was non-profit until it was sold to a previous owner in 2007 "received tax breaks for years, and now these owners will make a fistful of money."

The state Health Department doesn’t scrutinize real estate transactions. Hospitals are not required to disclose the terms, which may include escalating rent payments, or how they use the proceeds. The money need not be reinvested in the hospital, for example, and might be distributed to investors or used to buy another hospital or health care business.

Meadowlands Hospital Medical Center in Secaucus, also owned by a for-profit group, sold its land to a real estate investor in December 2013, but subsequently appeared to have cash problems that made it late with federal tax payments.

At a state budget hearing in April, Assemblyman Gary Schaer, D-Passaic, questioned Health Commissioner Mary O’Dowd about the state’s role. "We have a new arrangement that is relatively new in New Jersey, which is the unregulated sale lease-back, where hospital property is sold to private investors and leased back to hospital owners without any public scrutiny or protections," he said. "Is there a role for the [health] department to be much more involved in governance?"

In response, O’Dowd said, "There are a number of different financial vehicles that are available to different institutions. This happens to be one that hospitals have recently taken up, but it has been in practice in our nursing homes for a very long time." If the state interferes with hospitals’ ability to raise money that way, she said, the state may cause the hospitals financial harm.

Hackensack, in partnership with LHP Hospital Group, bought Mountainside Hospital in July 2012 for $190 million. Hackensack has a 20 percent stake in the 260-bed hospital.

The partnership also owns HackensackUMC at Pascack Valley, in Westwood. While there are no current plans to sell that hospital’s real estate to an investment trust, LHP, "like any smart company, is open to evaluating its options and favorable market conditions on an ongoing basis," an LHP spokeswoman said Tuesday.

LHP did not disclose the terms of the transaction involving Mountainside. The sale and lease-back "made good strategic sense," said John W. Ehrle, LHP’s chief financial officer. It’s "an efficient funding vehicle that, together with our cash from operations, positions us for additional investment in both our existing operations and future acquisitions," he said.

The company, based in Plano, Texas, has emphasized its long-term commitment to investing in and operating community hospitals, and the investment backing it receives from the Canadian Pension Plan Investment Board and CCMP Capital Advisors, one of the world’s largest private-equity funds.

"While the joint venture is a tax-paying entity, the not-for-profit partner was very involved in the negotiating and structuring of the transaction, including terms of the lease," said R. Steven Hamner, executive vice president and chief financial officer of Medical Properties Trust. It is MPT’s first deal with a not-for-profit hospital operator, he said, and "demonstrates that not-for-profit hospital operators are able to retain control over their real estate assets and at the same time benefit from the significant capital proceeds that result from sale/leaseback arrangements."

Medical Properties Trust will receive lease payments from the Montclair hospital for 15 years, with an option to renew for 25 years, according to a conference call with investors Tuesday. It will play no role in the hospital’s day-to-day operations. Typically, when a "tenant" in a hospital property it owns decides not to renew the lease, the trust then looks for another tenant, or hospital operator.